Learning how to read forex pairs and quotes is one of the most important lessons for traders to learn. It takes a little practice, but with time, reading pairs quotes unlocks the language of the markets and allows traders to read market movements, quickly and intuitively.
Reading currency pairs is easy. Every currency pair is a combination of two currencies: a base currency (meaning the first one in a pair;) and the quote currency (meaning the second or last currency in the pair).
Reading forex pairs
To read currency pairs the right way, you need to understand two basic concepts:
- ISO Code – Each currency in the world has an international ISO code. For instance, for the Euro, the code is EUR and for the US dollar, the code is USD.
- Base Currency/Variable Currency – For each forex quote, there are two currencies. The base currency and quote or variable currency. When you’re looking at a quote, the price base currency is reflected in units of the quote currency. For instance, in the EUR/USD quote where the price is $1.1301, the price of the Euro is one dollar, 13 cents, and 01 pips. It seems unusual since in the physical world you can’t hold a fraction of a cent, but fractions are common figures in forex trading.
Defining Forex quotes
Forex quotes are made up of currency pairs. Simply put a forex quote is the price of one currency in terms of another currency. These quotes are always made in pairs since you buy one currency and sell the other. Brokers usually quote two prices for every currency pair and they keep the difference, which is the spread, between the two prices.
The Bid and Ask Price
When you’re trading in forex, you’ll see a quote for two different prices.
- The bid or SELL price is the price that a trader can sell the currency.
- The ask or BUY price is the price that a trader can buy the currency with.
A trader is always looking to buy when the price is low and sell when the price is rising or sell in anticipation of the currency depreciating and buy it at a lower price in the future.
The Spreads
The difference between the price to buy a currency and the price to sell it is called the spread. Major currency pairs have tighter/less spread due to high volumes and liquidity. For instance, the EUR/USD is the most popular trading pair, which means that the spread can be as low as 0.4 pips.
Key takeaways
- The base currency is the first currency in the pair and the quote currency is the second.
- The smallest movement for a currency pair is one pip, which is the fourth decimal place of the quoted price. For JPY pairs, one pip is the second decimal place.
- The spread is the difference between the ASK price and the BID price
- The BID and ASK prices should be viewed from the point of view of the broker. Traders buy at the ask price and sell at the bid price.